Understanding Securities Markets and Performance
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XII — Securities Markets Foundation
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More units in NISM Series XII
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | None · a wrong answer costs nothing beyond the mark |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XII Securities Markets Foundation
Exam rules read on NISM's site on 17 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 17 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 15 questions on Understanding Securities Markets and Performance, with answers
Q1What is the main economic purpose of a securities market?
Option A. Record ownership without helping to raise funds
Why it is wrong: Ownership records support the market but do not describe its central funding role.
Option B. Fix future selling prices for all securities
Why it is wrong: Prices remain uncertain rather than being fixed by the market in advance.
Option C. Provide short-term loans from bank deposits
Why it is wrong: Bank lending is only one financing channel, not the main function of the securities market.
Option D. Channel savings into funding for issuers — Correct answer
Answer: D. A securities market connects investors with issuers that need capital. It helps savings finance business and government activity. Remember: Securities markets connect savings with capital needs.
Hint, shown before you answer in practice mode: Common mistake: Confusing access to capital with a guarantee of success. Think about the connection between surplus money and funding needs.
XII-001easyconceptual
Q2Which responsibility belongs to SEBI as the Indian securities-market regulator?
Option A. Set the monetary policy rate for the banking system
Why it is wrong: Monetary policy is a central-bank function rather than SEBI’s securities-market role.
Option B. Manage each registered investor’s personal portfolio
Why it is wrong: Regulation does not mean managing every investor’s holdings.
Option C. Protect investors and regulate the securities market — Correct answer
Option D. Determine the issue price of every company’s shares
Why it is wrong: SEBI does not act as the price setter for every public share offer.
Answer: C. SEBI protects investors and regulates and develops the securities market. Its role is oversight rather than choosing each investor’s portfolio. Remember: Securities-market regulation is different from monetary policy or investment management.
Hint, shown before you answer in practice mode: Common mistake: Confusing the duties of SEBI with those of a central bank. Separate oversight of securities markets from central banking and portfolio management.
XII-002easyregulatory
Q3A municipality raises money by selling bonds. What is its role in this transaction?
Option A. Depository participant
Why it is wrong: A depository participant provides access to depository services.
Option B. Issuer — Correct answer
Option C. Custodian
Why it is wrong: A custodian safeguards investment assets.
Option D. Credit rating agency
Why it is wrong: A credit rating agency assesses creditworthiness rather than borrowing through the bonds.
Answer: B. The municipality is the issuer because it sells its bonds to raise money. Remember: Governments and municipalities can issue securities.
Hint, shown before you answer in practice mode: Common mistake: Assuming that only private companies can issue securities. Focus on which party creates the security to obtain funds.
XII-003easyconceptual
Q4Which instrument represents an ownership interest rather than a loan to a company?
Option A. Commercial paper
Why it is wrong: Commercial paper is short-term borrowing rather than company ownership.
Option B. Corporate bond
Why it is wrong: A corporate bond represents money lent to the company.
Option C. Equity share — Correct answer
Option D. Non-convertible debenture
Why it is wrong: A non-convertible debenture is a debt instrument.
Answer: C. An equity share represents ownership in a company. Debt instruments represent borrowing obligations instead. Remember: Equity is ownership and debt is lending.
Hint, shown before you answer in practice mode: Common mistake: Treating all company-issued instruments as ownership interests. Distinguish an owner from a lender.
XII-004easyconceptual
Q5Which security practice helps protect a trading account against unauthorised access?
Option A. Using an additional authentication factor — Correct answer
Option B. Disabling security alerts from the platform
Why it is wrong: Disabling alerts can hide suspicious account activity.
Option C. Sharing passwords with a market group
Why it is wrong: Sharing passwords lets other people enter the account.
Option D. Reusing one password across every website
Why it is wrong: A password leak can then affect several accounts.
Answer: A. An additional authentication factor adds a separate check beyond the password. It reduces the chance of access through a stolen password alone. Remember: Protect account access with more than one authentication check.
Hint, shown before you answer in practice mode: Common mistake: Assuming that a password alone provides complete protection. Think about adding another check when someone signs in.
XII-005easyconceptual
Q6A company issues bonds to expand production. A household buys them. Which description correctly identifies their roles?
Option A. The company demands funds and the household supplies funds — Correct answer
Option B. The company supplies funds and the household demands funds
Why it is wrong: This reverses the borrower and investor roles.
Option C. Both parties demand funds from the securities market
Why it is wrong: The household is providing money rather than borrowing it.
Option D. Both parties supply funds to the securities market
Why it is wrong: The company is raising money rather than providing it.
Answer: A. The company demands capital and the household supplies it. The bond records the company’s obligation to its investor. Remember: Follow the cash flow to distinguish issuers from investors.
Hint, shown before you answer in practice mode: Common mistake: Confusing the flow of securities with the opposite flow of money. Trace the direction in which the subscription money moves.
XII-006mediumapplication
Q7How does an active resale market support the market for new securities?
Option A. It removes the need to disclose issuer information
Why it is wrong: Investors still need information to assess securities.
Option B. It makes the issuer repay equity capital every day
Why it is wrong: Resale normally transfers ownership without repayment by the issuer.
Option C. It gives investors a possible route to exit later — Correct answer
Option D. It fixes every future selling price at the issue price
Why it is wrong: Market prices can differ from the original issue price.
Answer: C. An active resale market gives investors an exit route. That can make them more willing to buy newly issued securities. Remember: Secondary-market liquidity supports primary-market participation.
Hint, shown before you answer in practice mode: Common mistake: Assuming that an exit route means an assured selling price. Think about why an investor values the ability to sell later.
XII-007mediumconceptual
Q8What does price discovery in a securities market mainly describe?
Option A. Prices rising whenever a company releases any information
Why it is wrong: New information can raise or lower a security’s price.
Option B. Prices being fixed permanently by the original issuer
Why it is wrong: Issue prices do not permanently fix secondary-market prices.
Option C. Prices being equal for all securities of different companies
Why it is wrong: Different securities have different risks and expected cash flows.
Option D. Prices emerging from interacting buy and sell interest — Correct answer
Answer: D. Price discovery is the process through which buying and selling interest helps establish market prices. Remember: Market prices reflect interactions among buyers and sellers.
Hint, shown before you answer in practice mode: Common mistake: Treating a discovered market price as a guaranteed fair value. Think about how competing orders arrive at a traded price.
XII-008mediumconceptual
Q9Why can a transferable security offer more flexibility than a non-transferable financial claim?
Option A. The holder may change its contractual terms alone
Why it is wrong: Transferability does not allow unilateral changes to the contract.
Option B. The holder may transfer the claim to another investor — Correct answer
Option C. The holder must receive a profit on every transfer
Why it is wrong: The transfer price can cause a loss.
Option D. The holder no longer faces any issuer-related risk
Why it is wrong: Transferability does not eliminate the issuer’s risk.
Answer: B. A transferable security allows its holder to pass the claim to another investor. The transfer remains subject to its terms and market conditions. Remember: Transferability improves flexibility without guaranteeing liquidity or profit.
Hint, shown before you answer in practice mode: Common mistake: Confusing the ability to transfer with the ability to sell without loss. Focus on what can happen to the ownership of the claim.
XII-009mediumconceptual
Q10Which description best distinguishes a custodian from an investment decision-maker?
Option A. A custodian replaces the investor as the economic owner
Why it is wrong: Custody does not normally transfer the investment’s economic ownership.
Option B. A custodian safeguards assets rather than choosing the portfolio — Correct answer
Option C. A custodian guarantees the market value of the portfolio
Why it is wrong: Safekeeping does not guarantee market value.
Option D. A custodian sets the expected return on every asset
Why it is wrong: Expected investment returns are not fixed by a custodian.
Answer: B. A custodian provides safekeeping and related services for investment assets. Choosing the portfolio is a separate function. Remember: Custody and investment management serve different purposes.
Hint, shown before you answer in practice mode: Common mistake: Assuming that holding assets in custody means selecting those assets. Separate safekeeping from deciding what to buy.
XII-010mediumconceptual
Q11A trading website becomes unavailable during an attack. Which measure most directly supports its recovery?
Option A. Tested backup systems and a recovery plan — Correct answer
Option B. Publication of users’ account passwords for support
Why it is wrong: Publishing passwords exposes accounts rather than restoring secure service.
Option C. A promise that users will earn higher returns
Why it is wrong: Return promises do not restore an interrupted service.
Option D. Removal of all access controls from the system
Why it is wrong: Removing controls can make the security problem worse.
Answer: A. Tested backups and a recovery plan help restore disrupted operations. Recovery capability is an important part of cyber resilience. Remember: Cyber resilience includes restoring services after an incident.
Hint, shown before you answer in practice mode: Common mistake: Focusing only on preventing attacks and ignoring recovery. Think about restoring operations after disruption.
XII-011mediumapplication
Q12What is the main purpose of a regulatory sandbox for financial innovation?
Option A. Approve every innovation for unrestricted public use
Why it is wrong: Testing does not automatically grant unrestricted approval.
Option B. Test innovations within a controlled framework — Correct answer
Option C. Remove every safeguard for participating customers
Why it is wrong: A sandbox uses boundaries and safeguards during testing.
Option D. Guarantee commercial success to every participating firm
Why it is wrong: A testing framework does not guarantee business success.
Answer: B. A regulatory sandbox allows controlled testing of financial innovations. It is not a general exemption from safeguards or supervision. Remember: A sandbox supports controlled experimentation.
Hint, shown before you answer in practice mode: Common mistake: Treating sandbox admission as full regulatory approval. Think of a limited testing environment rather than a permanent exemption.
XII-012mediumconceptual
Q13A business needs permanent capital. Investors want an eventual exit. Which arrangement can address both needs without requiring the business to redeem shares?
Option A. Issue equity and promise to repay every holder on demand
Why it is wrong: Mandatory on-demand repayment does not provide permanent equity funding.
Option B. Accept investor savings without creating any financial claim
Why it is wrong: Investors would not receive a defined security or ownership claim.
Option C. Issue bonds and prevent every later transfer between investors
Why it is wrong: This restricts the exit route and does not create equity capital.
Option D. Issue equity and enable investors to trade existing shares — Correct answer
Answer: D. Equity can remain with the business while investors exit by selling their shares to other investors. A resale changes ownership rather than withdrawing the company’s original capital. Remember: Permanent issuer funding can coexist with investor transferability.
Hint, shown before you answer in practice mode: Common mistake: Assuming every investor exit requires repayment by the company. Separate the company’s financing from an investor’s later sale.
XII-013hardapplication
Q14An investor asks who executes an exchange order and who maintains electronic holdings. Which pairing correctly separates these functions?
Option A. Stock broker for execution and depository system for holdings — Correct answer
Option B. Credit rating agency for execution and stock broker for holdings
Why it is wrong: A rating agency does not execute exchange orders or run the depository system.
Option C. Custodian for price setting and regulator for electronic holdings
Why it is wrong: Neither fixed price-setting by custodians nor personal holdings administration by regulators describes these functions.
Option D. Depository system for execution and issuer for all holdings
Why it is wrong: The depository system does not match stock-exchange orders.
Answer: A. A stock broker provides access to exchange order execution, while the depository system maintains electronic securities holdings. These functions support different stages of investing. Remember: Execution and electronic holding records are distinct market functions.
Hint, shown before you answer in practice mode: Common mistake: Assuming one intermediary performs every stage of a securities transaction. Treat placing a trade and keeping ownership records as separate jobs.
XII-014hardapplication
Q15A firm blocks unauthorised access but has never tested service restoration. A second firm tests both controls. Which assessment is strongest?
Option A. The second firm can no longer experience a cyber incident
Why it is wrong: Testing reduces weaknesses but cannot rule out every incident.
Option B. The first firm has already demonstrated complete resilience
Why it is wrong: Prevention controls alone do not demonstrate recovery capability.
Option C. The second firm addresses both protection and recovery — Correct answer
Option D. Both firms have equally demonstrated recovery capability
Why it is wrong: Only the second firm has tested its ability to restore service.
Answer: C. The second firm has tested both protection and recovery. The first firm has not demonstrated that it can restore operations after an incident. Remember: Cybersecurity controls and recovery testing complement each other.
Hint, shown before you answer in practice mode: Common mistake: Equating successful prevention controls with proven recovery capability. Compare preventing disruption with recovering after disruption.
XII-015hardapplication
Understanding Securities Markets and Performance: common questions
How many practice questions are there on Understanding Securities Markets and Performance?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 6 practice topics for NISM Series XII, which has 150 questions in total.
Are these real NISM Series XII questions on Understanding Securities Markets and Performance?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XII?
No. NISM applies no negative marking to Series XII. A wrong answer costs nothing beyond the mark you did not earn, so a blank is never better than an attempt. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
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